5 key factors to consider when planning your budgeting process.

Jan 2, 2020 | Governance, Management

The new year will bring budget season. For most, it will be an addition to the  day job, but it is a critical activity that is often treated with less application of critical and creative thinking than it demands as a precursor to superior performance.

Following are 5 fundamental factors to consider as you plan for the budgeting process, and allocate the resources necessary to deliver strategically significant outcomes, as well as, ‘the numbers’.  

Parentage.

Ensure the budgeting process is a child of the strategic priorities, and measures of progress towards the stated strategic objectives. If these strategic priorities are not clear, budgeting in the absence of strategy is like having a shower with a raincoat on, you will have done the process, but it will not do much good.

Rolling budget.

Make the budget a rolling document, reporting against the expectations articulated in the budget, and updated quarterly. For many, month reporting is standard, but mostly it is financial only, make it strategic as well.  However, monthly is too small a time frame against which to reliably measure for strategic progress, quarterly is preferable. This rolling process should not be just for the budget year, they should be rolling quarters, and perhaps more than 4 of them. Strategies should not change dramatically in the absence of some significant and unexpected external catalyst. What changes, are the tactics used to achieve the strategic objectives, and both must be measured. I have used a 5 quarter rolling ‘budget’ in the past. This time frame is long enough to enable a continuous process of critical thinking that becomes part of the routine performance management processes. It has the added psychological benefit that it is  not 4 quarters, that are too easily seen as a proxy for an annual budget. 

Zero based budget

Make the process zero based, or at least partly so. Do the critical analysis of what is required to deliver the long term. Which markets and customers should you be servicing, what capabilities do you need, which improvement activities do you prioritise, which investments make most sense, what tactical activities should we be doing, and so on. Then then cost it, while making forecasts of the tactical outcomes and longer term benefits derived from the various activities. Taking last years numbers and adding 3% is again getting under the shower with that rain coat on.

Zero based budgeting demands that assumptions be examined and validated before they are included in the numbers and forecasts. It is a means of testing the boundaries of the status quo, and enabling some extrapolations to be done, and strategically sound experiments to be undertaken, so forecasting can be based on data and experience rather than what one person thinks may be a good idea. It also demands cross functional buy in, particularly when improvements are being sought. Functional siloes usually get in the way of improvements, by focussing on their own patch, and not recognising the cross functional nature of processes.

It also requires an analytical approach to decision making in the place of the often qualitative approach used when you just bung on 3%.

Deploy Data.

Data is essential, no sensible budgeting effort can get away from the need to have quality data and depth of thought created by critical examination of the data. Internal data is essential, and as important, but usually just glossed over, is external and competitive data. While I always advise clients to worry about themselves rather than their competition, that does not detract from the simple  fact that competitors do have an impact on performance, so being able  to quantify that impact is of great value.

Do not trust the Status Quo.

In every organisation, the status quo exerts a great deal of pressure. Doing what has been done before, even if it is sub-optima, will rarely get you into trouble, but it does ensure at best average performance outcomes. The status quo will override any effort that is not supported by both critical thinking, creative solutions to well articulated challenges, and data. The automatic continuation of the status quo is always a sign of sloppy or absent thinking.

Happy budgeting, and if you need some experienced guidance, give me a call, today.

 

January 1, 2020. An introspective.

Jan 1, 2020 | Personal Rant, Strategy

 

It is the end of another year, in fact a decade.

‘What have I achieved’ seems to be a fair question.

For 24 years I have worked as a ’boutique’ consultancy. Some may think this is  just another word for ‘one man band,’ and they would be correct, however, there is a difference between my situation, and that of many ‘one man bands’

I chose it.

24 years ago, I took a strategic decision that after having a corporate career that ended abruptly, and then failed to restart, that I would  not play the corporate game again.

As I searched for a job that would both satisfy my aspirations and curiosity, while supporting a young family, people were coming to me for advice, and assistance. For 12 months or so I obliged while focussing on the job search, before the penny dropped.

I liked it  this way.

No corporate framework that dictated my life, over which I had limited control.

No fixed income that just demanded presence, along with sweat and actions that were not necessarily adding value.

No responsibility for things, processes, or people I had not chosen.

No position of institutional power and influence.

No institutional resources available to be deployed with no personal financial commitment.

No built in structures by which to manage my days, weeks and months.

On my own, utterly irrelevant to most passers-by.

On the other hand:

The kids have grown up, are educated, and pursuing worthwhile and satisfying careers

The house is paid off,

And, perhaps most importantly, my time is my own to deploy as I see fit against my personal priorities that deliver intellectual and financial returns to my family.

Over that 24 years, there have been times of plenty, and times of drought. A range of former and current clients in all sorts of industries, facing all sorts of challenges where I have been able to add value, several contract general management stints, partly proving to myself that I can still manage and lead effectively inside an institutional framework (although my dislike of silly rules and deluded people just gets another boost) but through everything, is the strong thread of doing only things that added value directly. No politics, no corporate bullshit, and, plenty of satisfaction.

As a side gig, the StrategyAudit blog, now a decade old has in excess of 1,800 posts, some of which are many years old, but still attract readers and commentary day in and day out. Those posts and the research material behind them is a bank of intellectual capital that is irreplaceable to me, and of considerable value to those who have taken the time to read, follow, and often comment on them.

I turn 68 in a few days, but do  not  feel it, and while I may look a bit weathered, most are surprised, and I am told, I generally do not act my age. However, that has been a continuing response since I was about 10. I can still hear my old dad intoning: ‘For heavens sake, act your age’

Meanwhile, Australia’s east coast burns after decades of self-serving neglect, an  institutional tin ear turned towards the science,  and decisions that reflect the political view that long term planning is limited by the electoral cycle.

In spite of the fire inspired gloom, and for some, desperation, of this new years day, have a happy and prosperous 2020, and I look forward to the coming decade.

Own your digital real estate, or slowly disappear in 2020.

Dec 22, 2019 | Change, Governance, Social Media, Strategy

It is getting harder and harder to be seen in the tsunami of stuff posted on various digital platforms.

The platform owners are wholesalers of eyeballs, their business is monetised by being the choke point between those who create material, and those who may benefit from seeing it.

Since the purchase of LinkedIn by Microsoft, the changes being made to generate a return on the $US26 billion paid have all been designed to build the case for monetising the access to the other side of the equation.

I have no problem with the principal, being paid for value delivered. However, for a small consultancy, wanting to inform, educate, demonstrate expertise, and add value, the costs can become significant.

There is an option.

Be really good, be different, and be of value to the few who really care.

Everything posted on the various ‘social’ platforms is first posted on my own digital home base, a point of distribution I own, so make the rules by which I operate, www.Strategyaudit.com.au . The alternative is to rely on platforms others own, where they make the rules by which you have to play.

For those who sometimes find value in what I write, subscribe to the posts on the site, rather than waiting to see them on LinkedIn or some other place, because you will miss most of  them.

Once subscribed, you have the option of reading them, or just skimming and moving on, the choice is yours, not that of an algorithm designed to extract rent for the privilege.

If the posts become less than valuable, unsubscribe. Easy.

For many years now the path has become increasingly clear: to be seen, you must own your own your digital real estate, not rent it from someone else. 

The recent changes in the LinkedIn algorithms have halved the number of people who see what I post, and moved them geographically. A set of eyeballs in Sydney is for me terrific, New York or Mumbai is of less value.

At some point soon I will simply stop posting outside my own digital real estate, relying on that oldest of marketing tools, word of mouth, to spread the word. At least then I know that those who see the stuff really care, perhaps learn, and might start a useful conversation, which is why I do it.

This is the last post for 2019. I hope it has been a good year for you.

As I sit here in Sydney, ringed by fire, and observe the impotence of the public governance  we have somehow inherited, the hubris and self interest that prevents sensible debate and change across our economy and social services, I can only believe we are at a tipping point. I remain an optimist, and hope against hope that 2020 sees the awakening of a feeling that we have to not only demand change for the better, but dig in and generate it, one by one, until it becomes unstoppable.

Merry Christmas, and I will see you next year

Oh come all ye turkeys

Dec 16, 2019 | Governance, Leadership

 

As we hurtle towards another Christmas, the turkeys are out, clamouring to be at the front of the line.

Australia’s latest quarterly GDP figures were released  on December 4, generating a flurry of commentary from all sides of the political and economic tables.

What are we mere every day Australians to make of this welter of ‘informed’ commentary, that takes the same set of figures and comes up with entirely different analysis, delivered as fact.

We have the treasurer spewing patronisingly about how well it is all going, the plan is working, as the number is 0.4% growth, an annualised 1.6%. This is down from forecasts, way down from the post GFC average growth of 2.6%, and a long term average of around 3.4%.

Not so sure I like the plan, particularly as all the anecdotal stuff I see indicates we are much deeper in the doo doo than those figures would indicate.

For example, household spending is steady at best by the numbers, awaiting the yet to happen Christmas shopping binge, which seems  unlikely to emerge. Household spending is a key component in the GDP figures, when it sags, the economy is heading for trouble. I expect a very poor outcome when the next quarters figures are released in March.

Unemployment was 5.3% in the latest numbers, and when you look at the graph, it is on a rising trend.  Perhaps it is time for a revision of the manner in which that number is calculated, in order to offer a more realistic picture than the one delivered by the current sanitised nonsense? Unemployment is the number of people looking for work in the period. It excludes those who could work, but are not actively looking. However, the catch is that ’employed’ is defined as anyone who is paid for more than 1 hour a week. By that measure, our unemployment rate may be 5.3%, but the real rate, the point at which the so called ’employed’ are able to live, pay the bills, and not look for more paid time, is way, way, way higher, and the rate amongst significant slices of the population, such as those under 20, is devastating.  Then you have the problem  my client base of SME manufacturing has, of actually finding tradesmen who are capable and willing,  to do the jobs necessary to keep our SME manufacturers competitive, thriving , and employing people.  Those trades do  not exist because we stopped training them and offering the dignity of work.

The unemployment number is an absolute nonsense, we all know it, yet it is a highlight of the political discourse.

The tax system is stuffed, as stuffed as that turkey that will be crammed into the oven as the kids rip the paper off the latest imported offering from K-mart. It is beyond the comprehension of the average person, all we see is the balance swinging against those who are in the PAYE system. Companies, particularly  multinationals, have the resources to manage down their taxes at a time when the governments are spending more, which needs to continue as our infrastructure ages, schools and trades education are in trouble, health costs are rising at a rate significantly greater than the anaemic inflation, and there are added costs like the NDIS.  There has to be a tipping point somewhere, and about now seems to me to be a fair bet. The Henry tax report is now a decade old, and none of the recommendations have been implemented. None. Ken Henry may have blotted his copybook at NAB, but that does not take away from the value of his contribution to public life generally, and specifically as the boss of Treasury, on whose advice Australia dodged the GFC bullet in 2008.

Trust in public institutions has never been lower. It is hard to pick the catalyst for this reality. Is it the realisation that institutions of all types, but  particularly those operating on a platform of faith, have been abusing our kids, that financial institutions have been stealing, politicians have a truly flexible relationship with the truth, or that social media has made us informed, lied to, mesmerised by trivia, and deeply cynical, all at the same time?

Enough, I am depressing myself, just as I have to think about going to the shops and spending on stuff I am not sure people want, for reasons I do not really understand, as should we not be generous with things way more important than money, with those we love and value all the time, not just around the summer solstice?   

The turkeys are all coming home to roost. 

The 3 terminal characteristics of 20th century accounting.

Dec 11, 2019 | Governance, Management

 

Accounting as generally taught at university, at least when I did it many years ago, and by observation since, does  not suit the 21st century.

It has served us well for centuries since the double entry system evolved from 15th century monk and mathematician Luca  Bartolomeo de Piccioli, and has not changed much since. Alfred Sloan who was CEO of General Motors for 23 years between 1923 and 1946, created what we would see as modern cost accounting, as he drove GM to be the biggest company in the world in his time. However, the context in which accounting is now used has again morphed into something completely different. Accounting practise has not followed quickly enough in 3 very fundamental ways.

It does not recognise a company’s most valuable assets.

The three fundamental parts of an accounting package are the Profit and Loss account, Balance Sheet and Cash flow statement. Together they offer what has been seen as the basis of analysis of the value of an enterprise, and forms the backbone of all management and reporting systems.

Why is it then that the value of many businesses as represented by their balance sheet, bears no resemblance at all to the valuations placed on them by the market?

Value in most enterprises now resides in ‘intangibles’, largely absent from the balance sheet because of the measurement difficulties. Intangible assets often walk out the door at 5.30, and have the confusing characteristic of being able to appreciate with use, unlike physical assets that depreciate.

A balance sheet, which records physical assets owned by an enterprise, is unable to adequately make this leap to intangible assets in preference to the easily measured physical assets, once the backbone of a valuation, but no longer. The occasional exception to this paradox is of course when a business is sold, or changed in some significant way, and an amount labelled ‘Goodwill’ can be added to the balance sheet. This amount rarely passes the ‘pub test’ and in any event, as the business has usually been sold, it is too late to be of any value to the now previous owners. 

Financial reports only the dollar outcome of asset deployment, not the value outcome.

I recall the zeal with which Michael Hammers book ‘Reengineering the corporation,’ published in 1993, was embraced by corporate management. They proceeded to outsource everything that was not  considered ‘strategic’ in the race to deliver ever increasing returns on net assets, a key measure for investors and analysts, driven by short term considerations. In the process of outsourcing, they failed to recognise the seemingly minor items that cumulatively delivered the value their customers were prepared to pay for.

The classic case is that of Dell Computer, who built a massive company quickly by redrawing the business model of PC sales, and then went public. This made Michael Dell a billionaire, but in the process of maintaining their impressive returns  upon which the IPO had been based, progressively outsourced their design, procurement, and manufacturing processes. Korean company ASUS became their primary supplier, then taking what they had learnt, turned around and became a competitor, leaving Dell without the operational capability to compete.

Listening to those working with the financial reports led them down this path, when they should have known better. After all, it was them that disrupted the previous manufacture/distributor model in order to maintain control of their own destiny, which they then gave away.

Accounting systems cannot tell the future

We are notoriously bad at telling the future, nor can it tell us what has not happened. About all we know is that it will be different to the past,  yet we accept an enterprise valuation that is a multiple of past cash flows. We also accept the numbers delivered as an unchangeable  fact, that gives us little scope to record the savings made by removing transaction costs and the hidden costs of waste in every system. Those deploying lean accounting systems are setting out to identify those cost savings, and recognise them, but the irony is that they need two sets of books. The traditional set, into which the lean accounting is back flushed to meet the accepted accounting standards, and the Lean books that identify the outcomes of actions taken to improve the processes that drive the costs of waste out.

The businesses that thrive in the 21st century will be assisted by the recognition of the paradox presented by the statutory accounts compared to ‘lean’ operational accounts, and effectively manage the inherent conflicts.

 

Cartoon Credit: Scott Adams and Dilbert, who bravely faces interrogation by accounting. Dilbert seems to be ever more common as the header to this blog, is it that I am getting older, or that Dilbert after 25 years is becoming even more relevant?